What do lenders consider when reviewing your credit report? It’s a simple question with a complicated answer, as there are no universal standards by which every lender judges potential borrowers.
Of course, there are certain things that will reduce your chances of getting approved just about anywhere. Considering what makes up your FICO score (which most people call “my credit score”) is a good place to start. FICO scores vary between 300 and 850, with any 650 or more being considered a good credit score. If your score is below 620, you will probably have a hard time borrowing money at great interest rates.??
Key points to remember
- Payment history accounts for 35% of a borrower’s FICO score and is the most important factor for lenders.
- Another major concern for lenders is large amounts of unpaid debt.
- Long experience using credit responsibly is good for your credit rating.
- Lenders want to make sure their customers are used to using multiple sources of credit, from credit cards to car loans, reliably.
What lenders are looking at on your credit report
More than anything else, lenders want to get paid. Therefore, a potential borrower’s track record of paying on time is of particular importance. In fact, in calculating a potential borrower’s FICO score, payment history is the most important factor. It represents 35% of the score.No one is enthusiastic about loaning money to someone who has shown a less than remarkable commitment to paying off debt.
Late payments, missed payments, defaulting on a mortgage and bankruptcy are all red flags for lenders, just like sending an account to a collection agency for default. While a few imperfections in your payment history may not prevent lenders from giving you money, you are likely to get approved for less money than you might have otherwise claimed, and you will need to probably pay a higher interest rate.
Another major concern for lenders is large amounts of unpaid debt. It’s a bit of a paradox, but the less debt you have, the more likely you are to obtain credit. The principle here is similar to that of the payment history. If you have a large amount of existing debt, the chances of you being able to pay it down decrease.
Large amounts vary from individual to individual and are defined based on parameters such as the individual’s total annual income and the debt utilization rate, which is the amount of debt divided by the amount. debt limit allowed in each account. Outstanding debt represents 30% of your FICO score calculation.
Length of credit history
Long experience using credit responsibly is good for your credit rating. How often you use your cards also plays a role. The length of your credit history is 15% of your FICO score.
Having an established credit history is good for your credit rating. Opening a bunch of new credit cards in a short period of time isn’t. When you suddenly open multiple credit cards, potential lenders can’t help but wonder why you need so much credit. They will also have questions about your ability to pay off debt if you suddenly choose to maximize all of those cards. The new credit represents 10% of your FICO score.
If you need a good credit score, grab a pass to open a new credit card account just to get that free travel mug or umbrella, and even that tempting 10% discount on your purchase at when opening a store account. Cashiers are paid to open new store credit cards and it is their job to convince you to open store credit card accounts. It is your duty to resist it and respectfully refuse to keep your credit rating to a decent level.
Alternatively, if you’ve already opened multiple credit cards and need to improve your credit score, consider contacting one of the top credit repair agencies for help.
Signing up for several new credit cards in a short period of time can hurt your credit score.
Types of credit used
From credit cards to auto loans and mortgages, consumers use credit in a variety of ways. From a lender’s perspective, the variety is good. Lenders want to make sure their customers are used to using multiple sources of credit reliably. Calculations of the FICO score give a weight of 10% to the types of credit used.
Beyond FICO: What Other Lenders Consider
Your FICO Score and its components provide a good set of general guidelines for the kind of things lenders consider when reviewing credit applications, but the topic is not limited to your score. Creditors may have their own proprietary scoring methodologies that use similar, but not identical, factors to determine an applicant’s credit eligibility.
It should also be borne in mind that while your credit rating plays an important role in your eligibility for credit, it is not the only factor that lenders consider. Factors such as the amount of your income, the amount of money you have in the bank, and the length of your employment are also looked at. Also, remember that every time you co-sign a loan for another borrower, the payment history on that loan becomes your history as well.